Newly inaugurated President Donald Trump will usher in a new era of looking to fiscal rather than monetary policy to stimulate the United States economy – a model that ironically may strengthen monetary policy as the central bank subsequently raises rates, he says.

“In his inauguration speech, Trump dashed any hopes on a softening of his protectionist stance showed during his campaign,” Cornelissen says. “The guiding principles will be ’America First’ and ‘buy American, hire American’, raising uncomfortable echoes of the 1930s.”

China the whipping boy

“The US will pull out of the Trans-Pacific Partnership, negotiated under the former Obama administration with eleven Pacific Rim economies, including Japan but excluding China. And the governments of Canada and Mexico will be notified almost immediately that the new administration intends to renegotiate the North American Free Trade Agreement (NAFTA) and withdraw from it unless the US gets a ‘satisfactory’ deal, implying ‘a fair deal’ to American workers.”

“China has been a frequent target of the president’s rhetoric: it has been threatened with 45% tariffs on its exports. It has also been accused of manipulating its currency to the detriment of US interests. Ironically, in the recent past, China has tried to dampen the weakening of the yuan vis-à-vis the US dollar by massive currency interventions, in line with US interests.”

“Europe has not been free from pressure either. In an interview with German newspaper Bild, Trump threatened to impose a 35% tariff – he called it a ‘tax’ – on every car that BMW exports to the US. It is clear that souring trade relations do not bode well for world economic growth, and could easily damage US growth prospects as well. It will also push up inflation, an inflation of the wrong type.”

Expansive fiscal policy

Cornelissen says a potential positive, albeit with consequences for US national debt, would be Trump’s plans to use fiscal rather than monetary policy to stimulate the economy and create jobs – a tactic which Robeco highlighted as ‘Time for Plan B’ in its recent 2017 outlook.

“Fiscal policy will expand; firstly, individual and corporate tax rates will be lowered,” Cornelissen says. “Apart from that, Trump wants to implement vast public works to repair and rebuild US infrastructure. Also, he wishes to rebuild the American military, especially strengthening the size of the Air Force and Navy to assure the US’s unquestionable military dominance.”

“On the other hand, Social Security and Medicare benefits should be preserved. It is clear that a complete implementation of this agenda will lead to huge budget deficits, which would be unpopular with the substantial group of fiscal hawks within the Republican Party.”

‘It remains to be seen how substantial the fiscal push will be’

“It remains to be seen how substantial the fiscal push will be in the end. For infrastructure, proposals are floating to implement this primarily via tax credits and public/private partnerships, in which case it is doubtful if this will amount to anything substantial in macroeconomic terms. Fiscal hawks are also calling for budgetary neutral changes in taxation.”

“In the end it all depends on Trump’s cooperation with the US Congress, especially with the Senate, in which the Republicans have a small majority of two, and are far from the 60-40 ‘filibuster-proof’ majority that would allow them to essentially force through legislation.”

Tighter monetary policy

Regarding monetary policy, the Federal Reserve is likely to raise rates in 2017 – Robeco predicts three quarter-point rises, taking the minimum lending rate to 1.5% for the first time since the financial crisis. And that would further strengthen an already sky-high dollar, creating new economic problems for the US.

“With the US expansion already in its eighth year, and a continuing improving labor market leading to almost full employment, any additional fiscal push will lead to higher inflation and push the US central bank to higher interest rates,” Cornelissen says.

“The US dollar will strengthen and the US current account deficit will worsen. This last factor could easily stir up calls for more protectionist measures. During his campaign, Trump was highly critical of the Fed, which in his view was conducting overly loose monetary policy. It remains to be seen if his attitude changes when monetary policy starts to bite.”

Deregulation targets

“A high priority of the new administration is unraveling Obamacare; the Dodd-Frank Act on financial reform could also be a casualty,” he says. “The US will also abandon its commitments under the Paris agreement on climate change, and roll back Obama’s Clean Power Plan.”

“Further afield, Trump has been sowing doubts about his commitment to NATO. His questioning of the US’s ‘One China’ policy regarding Taiwan is seen by some as an opening move in a negotiating process that would end with a US withdrawal from the West Pacific.”

“This isolationistic stance could easily lead to higher geopolitical tensions, as China and Russia will see it as an invitation to flex their muscles. A scrapping of sanctions relief under the Iran nuclear deal could also strain relations with European allies and raise geopolitical tensions in the Middle East. We’re in for a bumpy ride.”

A new era dawns for the United States, but how long will it take newly inaugurated President Trump to change the course of the supertanker that is America? In a series of four articles we analyze the likely economic effects, and the effect on the US companies in which we invest.

Visit us on social media

Stay updated

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

Robeco uses cookies to analyze your visit to this site, to share information via social media and to personalize the site and the advertisements in line with your own preferences. By clicking on agree or by continuing on this site, you agree to the above. More information and adjusting cookie settings.